NFRA proposes revision to Standards of Auditing (SA) 600 to allow review of component / branch auditors work
The SA 600 issued by ICAI titled as using the work of another auditor is sought to be revised by NFRA by introducing SA 600 (Revised), Special Considerations—Audits of Group Financial Statements (including the work of component auditors)
The Standards on Auditing (SAs) apply to an audit of group financial statements (a group audit). This SA deals with special considerations that apply to a group audit, including in those circumstances when component auditors are involved.
As per revised SA 600, the group auditor may involve component auditors to provide information, or to perform audit work, to fulfill the requirements of SA. The group auditor may review the component auditor’s audit documentation in person or remotely when permitted by law and regulation.
The revisions proposed shall be applicable to audits of Public Interest Entities (PIEs) that fall under Rule 3 of NFRA Rules 2018, except Public Sector Enterprises, Public Sector Banks, Public Sector Insurance Entities, and their respective branches.
The Companies Act 2013 (the Act) requires that every auditor shall comply with the auditing standards. Further, sub-section 10 of Section 143 of the Act states that the Central Government may prescribe the standards of auditing (SAs) or any addendum thereto, as recommended by the Institute of Chartered Accountants of India (ICAI), in consultation with and after examination of the recommendations made by the National Financial Reporting Authority (NFRA). Further it has been provided that until, the SAs are prescribed by the Central Government, the SAs specified by the ICAI shall be deemed to be auditing standard.
Presently, the SAs have not yet been notified under the Companies Act, 2013 and as per the proviso to section 143(10) of the Act, the standards specified by the ICAI in 2009 are in force. In India, SA 600 was issued by the ICAI in April 1995 and revised in September 2002. Since then it has not been revised.
NFRA during the course of its functioning and investigation into matters referred to NFRA by the MCA, GOI and SEBI observed severe deficiencies and lack of understanding on the part of the audit firms and auditors of their responsibilities in law, and improper application of the standards.
The primary reason for proposing revisions SA 600 for group audits is to help safeguard public interest and investor protection, and the need for a standards framework that is robust enough to meet the challenges posed by complex financial systems today. The inherent complexity of group structures cannot be handled by the 2002 version of SA 600 and the related provisions across other standards.
The existing SA 600 provides that when the auditor delegates work to assistants or uses work performed by other auditors and experts, he will continue to be responsible for forming and expressing his opinion on financial information. However, he will be entitled to rely on work performed by others, provided he exercises adequate skill and care and is not aware of any reason to believe that he should not have so relied. It states that the principal auditor would not be responsible in respect of the work entrusted to the other auditors, except in circumstances which should have aroused his suspicion about the reliability of the work performed by the other auditors.
The NFRA is of the view that the language employed leaves a lot of discretion at the hands of the Principal Auditor and even in cases where components auditors reported fraud and issues related to going concern, Principal Auditors have tried to take shelter behind these clauses. Hence, the Standards are required to be updated to bring in clarity in auditors’ other obligations with respect to audit of Group entities.
SA 600, as it exists today, does not permit review of work papers of component auditors by the principal auditor. The ICAI maintained that sharing of work papers is not permitted in Chartered Accountants Act 1949 as disclosing confidential information acquired in the course of professional engagement amounts to professional misconduct. Further Code of Ethics also says that the main auditors of an enterprise do not have right of access to the audit working papers of the branch auditors.
Thus, the existing regulations of ICAI are are not consistent with CA 2013. Instead, the principal auditor has right of access to all records that aid him in fulfilling his responsibility under section 143 of CA 2013. Provisions regarding review of work papers are essential for overall quality of audit and investor protection and aid the principal auditor in seeking sufficient and appropriate evidence of work done by branch auditors, in support of the principal auditor’s overall opinion on the financial statements.
According to NFRA, pursuant to the issue of ISA 600 (Revised) by IAASB, major jurisdictions across the globe have adopted/converged with ISA 600 (Revised) which permits sharing of working papers.
The revised SA 600 provided that the group auditor shall determine whether, and the extent to which, it is necessary to review additional component auditor audit documentation. If the group auditor concludes that the work of the component auditor is not adequate for the group auditor’s purposes, the group auditor shall determine what additional audit procedures are to be performed, and whether they are to be performed by a component auditor or by the group auditor.
The comments in this regard to NFRA may be captioned as “Comments on proposed SA 600 (Revised)” for ease of reference. The last date for receiving the comments is 30 October 2024.
Email nfra-comments@nfra.gov.in captioned “Comments on proposed SA 600 (Revised)
Postal Captioned “Comments on proposed SA 600 (Revised)” to:
Secretary, National Financial Reporting Authority
7th-8th Floor, Hindustan Times House,
18-20, Kasturba Gandhi Marg, New Delhi 110001.
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